A couple of years ago the Government announced a Tax-Free Childcare scheme and have recently announced this will launch sometime in 2017. Under this scheme eligible families will be given 20% of their annual childcare costs by the Government. Parents will have to create a Childcare Account and for every 80p they pay into it they will receive 20p from the Government. The contribution into the scheme is capped at £10,000 per annum of childcare costs per child but this could mean receiving up to £2,000 contribution from the Government. However in order to qualify for this both parents must be working.
Currently working parents can obtain childcare vouchers through their employer if a childcare voucher scheme is available. Childcare voucher schemes are generally provided under salary sacrifice meaning the employee will pay less tax and national insurance as they are giving up part of their salary in return for the vouchers. Whilst childcare vouchers may help save tax and NI, reducing salary will affect gross earnings declared for obtaining a mortgage or loan.
Childcare vouchers do have a maximum limit based on the level of tax you paid. Basic rate tax payers can receive £243 of vouchers each month; higher rate tax payers receive £124 per month.
So which scheme will suit you best?
- Self-employed people or couples who earn less than £150,00 each are eligible for the Tax-Free Childcare scheme but can't get childcare vouchers.
- Parents with more than one child and high childcare costs are better with the Tax-Free Childcare scheme as the help available increases with each child whereas there is a limit to the value of childcare vouchers which doesn't change for additional children.
- If one parent doesn't work they are better off with childcare vouchers.
- If childcare is £9,336 or less basic rate taxpayer parents will be better with childcare vouchers.
- If childcare is £6252 or less higher rate taxpayers will be better off with childcare vouchers than the Tax-Free Childcare scheme.
- Parents earning over £150,000 are not eligible for the Tax-Free Scheme so will need to use childcare vouchers.
Childcare Voucher Schemes will not be able to accept new entrants from April 2018 therefore any eligible parent who will be better off with this Scheme rather than the new Tax-Free Childcare scheme should join before this date. This option will only be available if employers offer a Childcare Voucher scheme. Employers are not obliged to offer this and many do not because of the additional costs and administration involved.